Threats and Opportunities of Distributed Power Generation

• Rooftop solar panels aren't the only distributed generation technology that could challenge existing utility business models as it grows.
• Some power companies see DG as an opportunity and are entering this segment in ways that could prove challenging to their start-up competitors.

Two recent news stories highlighted different ways that utilities and large generating companies are beginning to respond to the emergence of distributed generation (DG) as more than back-up power. Arizona Public Service (APS) is launching its version of potentially the most challenging type of DG for utilities, rooftop solar. Meanwhile, Exelon Corp. announced an investment partnership with a provider of gas-powered fuel cells. The success of such ventures and the evolution of DG will have implications for electrical grid stability and our future energy mix, including the role of flexible, large-scale gas-fired generation.

APS is seeking regulatory approval for a program that might be characterized as free rooftop solar. In effect, they would lease approved homeowners' rooftops for $30 per month, in order to host a total of 20 MW of solar panels that would be owned and controlled by APS. The idea has generated some controversy, partly due to the utility's rocky relationship with the solar industry over issues like "net metering". 

The plan would enable homeowners who might not otherwise qualify for solar leasing from third parties to have solar installed on their homes, although they would apparently still receive their electricity through the meter from the grid, rather than mainly from the rooftop installation. That's a very different model from most DG approaches, though under current market conditions the net benefit to consumers reportedly would match or exceed that from solar leasing.

Exelon's announcement seems aimed at a different segment of the market, and based on a very different technology. The company would finance the installation of 21 MW of Bloom Energy's fuel cell generators at businesses in several states, including California. Bloom made quite a splash when it introduced its "energy servers", including a popular segment on "60 Minutes" in 2010.

Bloom's devices, which come in models producing either 100 kW or 200 kW, are built around solid oxide fuel cells.  At that scale they are too large for individual homes but suitable for many businesses. And because they are modular, they can be combined to meet the energy needs of larger offices or commercial facilities such as data centers. Unlike the fuel cells being deployed in limited numbers of automobiles, they do not require a source of hydrogen gas. Instead they run directly on natural gas from which hydrogen is extracted ("auto-reformed") inside the box.

In that respect, despite their novel technology, Bloom's servers are much closer than rooftop solar to traditional distributed energy, in which a customer owns or leases a small generator to which it supplies fuel. The advantages of Bloom's model are that its servers are designed for highly efficient 24x7 operation, without the expensive energy storage necessary to turn solar into 24x7 power, and with much lower greenhouse gas emissions and local pollution than a diesel generator.

In order to qualify as true zero-emission energy, these installations would need to be connected to a source of biogas, e.g., landfill gas, which effectively creates a closed emissions loop or recycles emissions that would have occurred elsewhere.  Even running on ordinary natural gas, the stated emissions of Bloom's energy servers are roughly a third less than the average emissions for US grid electricity, or 20% lower than the average for other natural gas generation. However, their emissions are over 10% higher than the 2012 average for California's grid.

I find it interesting that Exelon, the largest nuclear power operator in the US and owner of a full array of utility-scale gas, coal, hydro, wind and solar power, would make a high-profile investment in a technology that could ultimately slash the demand for its large central power plants. The company has invested in utility-scale solar and wind power, and as the press release indicated, is already involved in "onsite solar, emergency generation and cogeneration" via its Constellation subsidiary. In fact, it has apparently already achieved its goal of eliminating the equivalent of its 2001 carbon footprint.  However, the press release hints that something else might have attracted them to this deal.

Consider all the changes in store for the power grid. Baseload coal power is declining due to the combination of economic forces and strong emissions regulations such as the EPA's Clean Power Plan. Even some nuclear power plants, which have been the workhorses of the fleet for the last several decades, are facing premature retirement for non-operational reasons. At the same time, grid operators must integrate steadily growing proportions of intermittent renewable energy (wind and solar), along with increasingly sophisticated tools like demand response and energy storage. If any of this goes wrong, electric reliability will likely suffer.

From that perspective, Exelon's small--for them--step into DG also looks like a bet on the future value of reliability--"non-intermittent...reliable, resilient and distributed power." That's a bet even an old oil trader can understand: Uncertainty creates volatility, and volatility creates opportunities. I will be very interested to see how this turns out. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Deploying Extra Power for Japan

Just over two weeks after the earthquake near Sendai in northeastern Japan, which I'm increasingly seeing referred to as the "Great Tohoku Earthquake", the impact of the resulting disruption to various supply chains is being felt around the world. From car factories in Europe that rely on Japanese electronic components to producers of flat-panel displays and solar cells, several industries are feeling the pinch. This appears to be due more to the reduction in Japan's electricity-generation capacity than from actual damage to factories in the zone most affected by the disaster. With more power plants than just the troubled Fukushima Daiichi nuclear complex affected, the scale and potential duration of electricity shortages could result in a significant increase in the demand for smaller-scale generation, both conventional and renewable.

As reported in today's Wall St. Journal, the electricity shortfall resulting from the quake and tsunami is severe and affects both consumers and businesses. The Japanese government is exploring a number of emergency measures to mitigate the problem, including increasing electricity prices, instituting Daylight Savings Time, and calling on customers to conserve power. At the same time, the government appears to understand that Japan's scope for large-scale energy-efficiency improvements is limited. With an energy intensity in BTUs per dollar of GDP already 37% lower than that of the US, only the UK among large developed countries is more efficient. Efficiency and conservation will be helpful, but they can't cover the massive shortfall Japan faces now.

One of the most detailed analyses of the impact of the quake and tsunami on Japan's electricity sector that I've seen so far suggests that as much as 15,000 MW of generating capacity in the Tokyo/Tohoku region is offline and likely to remain so for durations ranging from a few months to several years--or permanently, in the case of most of the reactors at Fukushima Daiichi. This is something like 20% of the pre-quake generating capacity of the two main utilities serving the region, not counting the pumped-hydro storage capacity used for meeting peak demand. As a result, that part of Japan is experiencing an electricity deficit that will likely grow as the summer peak demand months approach, and that could persist even after the least-damaged facilities return to service. Nor can surplus power from southern Japan provide much assistance, because the northern and southern systems are relatively isolated from each other, with limited interconnections, and run on different frequencies--60 cycles for the south and 50 cycles for the north. Back-up and distributed generation appears to be the only real alternative to a protracted economic slowdown caused by insufficient electricity for Japan's businesses and industries.

We've seen this pattern before, if from different and less-catastrophic causes. In the early 1990s the Philippine grid was chronically unreliable, and many businesses bought or leased diesel generators to fill the gap, including barge-mounted units that could be brought in quickly and moved around coastlines and rivers as demand shifted. More recently, diesel demand in China increased substantially in the lead-up to the 2008 Summer Olympics, as the central government idled large, dirty power plants in order to reduce air pollution, and a number of factories chose to generate their own power, rather than shutting down.

For Japanese factories and other businesses facing the same dilemma, cost is unlikely to be the major factor in deciding whether or not to become more energy self-sufficient. Factory managers can often justify paying a lot more for power if their only other option is to slow production or shut down. They have several choices available, including some renewable power options, and I expect to see a surge in solar power installations. However, that's probably a better medium-term rather than short-term option, not just because the entire world didn't install enough solar panels last year to make up for the lost output of the Japanese nuclear plants, but because while solar can help with supply, it can't provide the reliability that is crucial right now. That makes diesel generation the leading contender to backstop Japan's idled power plants in the short term.

I can't speak to the availability of diesel generators, although I can easily envision suppliers and leasing agents scrambling to meet frantic Japanese orders. However, if enough generators are available to cover even 3,000 MW of the shortfall, running just half the time, they would require around 65,000 barrels per day of incremental diesel fuel, or roughly the entire diesel output of a medium-sized refinery. Whether that represented an increase in overall Japanese diesel consumption requiring additional imports would depend on the extent of the other economic consequences of the Tohoku disaster, and on when Japan's refineries return to normal operations.

So the use of diesel generators to make up for damaged or otherwise unavailable generating capacity in Japan could provide another modest boost to global oil demand, which already appears to have exceeded the record level set prior to the recession and financial crisis. And since much of that increased demand is for diesel, rather than gasoline, the impact of Japanese generation needs could affect diesel prices disproportionally. As a result, consumers around the world could see diesel prices rise, as the ripples from the events in Japan spread.

Energy from All Around Us

It's somewhat ironic that the long-awaited approval of the Cape Wind offshore wind project by the Department of Interior (DOI) should come in the same week that the nation's attention is focused on the problems of another, more traditional offshore energy project. Although the renewable electricity from the former scarcely substitutes for petroleum from the latter, Cape Wind is nevertheless emblematic of an intentional shift from energy sourced far away, in places like the deepwater Gulf of Mexico, to energy derived from sources all around us. If Secretary Salazar had turned it down, it would have cast serious doubts on the administration's entire clean energy agenda. However, concurrence with this one project doesn't answer all questions concerning the larger shift, of which it represents just a small component. Similar issues are bound to come up with increasing frequency as the transition to new energy continues.

Cape Wind and the Macondo prospect that the Deepwater Horizon rig was drilling into represent opposite poles of the energy spectrum, and not just because the latter is now leaking oil into the marine environment at a rate that the latest estimate puts at 5,000 barrels per day, much higher than initially thought. Cape Wind would tap into the clean and renewable, but extremely diffuse energy sources that surround us. After taking into account the restrictions imposed by DOI, its 130 turbines would on average generate as much electricity as a gas turbine power plant consuming a quantity of natural gas equivalent to 6,000 bbls/day of oil. In other words, it takes a very large array of offshore wind turbines to match the energy in the oil currently leaking from a single well. Platforms similar to what BP might have been planning to install after successfully completing the exploration of Macondo routinely produce up to 20 times that much oil.

The implications of this huge difference in energy density are clear. Without the energy concentration that nature has embedded in fossil fuels over many millennia, the hardware required to tap natural energy flows in real time becomes vast in extent. Generating 20% of US electricity needs from wind, which some see as just the beginning, will ultimately require more than 8 times as much wind capacity as the 35,000 MW installed as of the end of last year, even if US electricity demand remains static in the interim. Solar power, which last year generated just 0.02% of our electricity, would have to increase by a much larger factor. This is one of many reasons that increased reliance on nuclear power is such an important element of the transition to more sustainable energy sources, because nuclear--and to a lesser extent geothermal power--represents a critical source of highly-concentrated, low-emission energy. The more nuclear in the mix, replacing baseload coal, the less we must rely on distributed energy gathered in our immediate vicinity.

In any case, in order to obtain a much larger portion of our energy diet from sources like onshore and offshore wind and solar power, projects like Cape Wind must go from being rarities to ubiquitous features of our seascapes and landscapes. The opposition to Cape Wind that has delayed this project for years is focused on a central dilemma of that shift: Many of the same underlying trends that lead us to want to harness clean energy from wind, sunlight and geothermal heat have also increased our focus on the broadly-defined environmental impacts of doing so.

Our grandparents wouldn't have blinked at putting up tens of thousands of wind turbines, let alone the few hundred slated for Nantucket Sound. They'd have thought of them as signs of progress, just as they viewed oil derricks and power lines. It's incumbent on us to balance our more modern sensibilities related to the "viewscape" with fundamental environmental challenges of climate change and sustainability, as well as the need to sustain the energy supplies our civilization requires. Approving Cape Wind--whether it eventually gets built or not--is entirely consistent with those imperatives.

Dangerous Delusions

If you've read this blog for any length of time, you know that it's not my practice to single out individual officials or politicians for particular praise or criticism, preferring an even-handed and scrupulously non-partisan approach. So it is with some reluctance that I feel compelled to share my considerable alarm about the views expressed by the new Chairman of the Federal Energy Regulatory Commission (FERC), Mr. Wellinghoff. His suggestion that "baseload capacity is going to become an anachronism" and that renewable energy can meet all our future energy needs represents a dangerous delusion, at least for the next several decades. I am not dismissing the vital contribution of renewables in addressing climate change, or the potential of a smarter electricity grid to accommodate a greater share of generation from renewable sources than would be feasible today. However, while I appreciate the benefits of visionary leadership in moving the country towards those goals, that vision must be grounded in reality, and not skewed by wishful thinking or the ingrained habits of a long career spent in advocacy for renewable energy.

My first recommendation to Mr. Wellinghoff would be to read today's Washington Post op-ed by Dr. James Schlesinger, the nation's first Secretary of Energy, and Dr. James Hirsch, a former official of that department's predecessor agency. More than 30 years ago, they were responsible for the early research initiatives that helped to develop many of the renewable energy technologies that Mr. Wellinghoff promotes. Their deeply informed comments on the inherent limitations of renewable energy lead to inescapable conclusions about the need to balance these intermittent and cyclical energy sources with the stability provided by large, central generating facilities capable of producing electricity around the clock, without daily or seasonal fluctuations.

My next suggestion to him would be to invest some time analyzing the electricity statistics of Denmark, which leads the world in deriving nearly 20% of its electricity needs from wind power. These data demonstrate the dramatic seasonal variance in Denmark's wind output. In 2008 alone, the country's 3,180 MW of wind turbines generated as little as 234 gigawatt-hours (GWh) per month (May) and as much as 1,050 GWh (Jan.), resulting in monthly effective capacity factors ranging from 10% to 44% of installed capacity. The monthly stats also demonstrate how this remarkable volatility can be accommodated without causing massive disruptions to the Danish economy. This is only possible through tight integration of the Danish electricity grid with those of its neighbors via robust interconnections--big power lines. When Denmark has more wind power than it needs, it is exported to Norway, Sweden and Germany. When its wind turbines are becalmed, it draws on the enormous hydroelectric reserves of Norway and nuclear and hydropower from Sweden. Because of the variability of wind power, Denmark's electricity import/export balance fluctuates daily, monthly, seasonally, and even from year to year. But the US isn't Denmark. We have 55 times as many people, and no neighbors with bigger power grids than ours.

We can't yet know the mix of central and distributed power, or of baseload and variable power that the US will ultimately need to power our economy and meet the emissions reduction targets we will take on. Improvement of the grid and the advent of "dispatchable demand", including smarter appliances and electric vehicles that could be preferentially recharged when renewable electricity is abundant will certainly increase the amount of renewable energy that can be absorbed usefully. However, that will not entirely obviate the need for large baseload power plants, and pursuing an agenda that makes it more difficult to build at least enough new nuclear power plants by the 2020s and 2030s to maintain nuclear's present 20% share of net generation would be disastrous for both US energy security and for our ability to reduce our contribution to climate change. I can only hope that Mr. Wellinghoff is open to modifying his views, as he adapts to his new role.